Auditing: Financial Audit and Inventory

1424 Words Jun 19th, 2013 6 Pages
Case study

Answers to case study:

1. What are the auditor 's primary objectives when he or she observes the client 's annual physical inventory?
Ans. The Primary Objective of auditor is to make sure the inventory reflected on the balance sheet actually exists and that the balance sheet includes all inventory owned by the company .This includes all raw material,supplies,inventory in transit.The company may have on consignment with another business and inventory stored off the premises. Confirming the existence of inventory through observation address the occurrence and completeness assertion as well.
Auditors job is to watch employees and make sure they following agreed upon procedure of company
There are two main
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Test high-value items. If there are items in the inventory that are of unusually high value, the auditors will likely spend extra time counting them in inventory, ensuring that they are valued correctly, and tracing them into the valuation report that carries forward into the inventory balance in the general ledger.
Test error-prone items. If the auditors have noticed an error trend in prior years for specific inventory items, they will be more likely to test these items again.
Test inventory in transit. There is a risk that you have inventory in transit from one storage location to another at the time of the physical count. Auditors test for this by reviewing your transfer documentation.
Test item costs. The auditors need to know where purchased costs in your accounting records come from, so they will compare the amounts in recent supplier invoices to the costs listed in your inventory valuation.
Review freight costs. You can either include freight costs in inventory or charge it to expense in the period incurred, but you need to be consistent in your treatment - so the auditors will trace a selection of freight invoices through your accounting system to see how they are handled.
Test for lower of cost or market. The auditors must follow the lower of cost or market rule, and will do so by comparing a selection of market prices to their recorded costs.
Finished goods cost analysis. If a significant proportion of the inventory valuation is comprised of finished
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